ESTATE PLANNING: THE PRESERVATION OF FAMILY WEALTH WITH WILLS AND TRUSTS

What is estate planning?

Estate planning is the use of legal techniques to:

Maximize the amount of your wealth that can be passed on to others either upon death or during your lifetime.
and

Insure that the assets that you have accumulated over your lifetime go to the beneficiaries you have designated.

Why then, doesn’t everybody have an estate plan? After all, maximizing wealth, minimizing or eliminating estate taxes and the costs attendant to probate, and securing your assets for the benefit of those you love and care about are certainly worthwhile goals.

The answer is twofold and simple: Confusion and Procrastination.

Only you can do something about procrastination.

As attorneys we can help clear up some of the confusion by giving you some straight forward answers to the five most frequently asked estate planning questions:

1. Do you have an estate?

If you own a home, or a bank account, or an insurance policy, you have an estate. “Estate” is merely the term used to describe what a person owns at the time of death.

Although wealth does increase the urgency of prudent planning, one need not be wealthy to have an estate. A home, a savings account and a life insurance policy or retirement plan benefits constitute an estate.

An estate is usually the result of a lifetime’s accumulation of assets. Whether there are a lot of assets or only a few, with the ownership of assets comes the responsibility to be a conscientious steward of those assets. Having an estate plan is a part of that responsibility.

2. What is an “estate plan” and What happens if I don’t have one?

An “Estate Plan” is an essential part of the responsible stewardship of assets. It guarantees that assets you own will be distributed to those you intend to benefit and that the distribution will be accomplished with the least amount of costs, fees and taxes paid out of your estate.

Without an estate plan, your assets will be distributed in accordance with the laws of the State of California. In other words, the state will determine who benefits, not you.

Without an estate plan, not only do you lose control over who your beneficiaries are, but your estate will be decreased by the cost of probate fees and estate taxes.

An estate plan will also typically include provisions for determining who would handle your financial affairs and make health care decisions for you in the event you are unable to make these decisions for yourself.

Without documents stating who and how you would like to handle your assets and your personal health care decisions, the court would have to make such a determination in a court supervised “conservatorship” proceeding.

3. What is probate?

In the 1960’s a book entitled “How to Avoid Probate” by Norman F. Dacey was a best seller. Why would a book about probate avoidance be a best seller? Because, as Mr. Dacey recognized, most people would like to avoid the time and expense of probate.

“Probate” refers to the court supervised process of transferring a decedent’s assets to the living beneficiaries. Since a deceased person cannot sign deeds, transfer bank accounts or stock, the court, in the process called probate, appoints a personal representative to transfer the assets. The court supervises the representative’s activities to make sure the transfers are properly executed.

This court supervision has the disadvantage of costing money, taking a great deal of time and making all matters public.

Probate Fees: Probate fees are determined by statute and are based on a percentage of the fair market value of assets as of the date of death. They can constitute anywhere from 2% to 4% of the gross value of an estate. This means that a home with a fair market value of $500,000.00 and a mortgage of $350,000.00 would be assessed probate fees based not on the $150,000.00 of equity, but on the $500,000.00 fair market value.

Time: Because the probate process requires court approval and a mandatory creditor’s claim waiting period, the distribution of assets to beneficiaries takes anywhere from 9 months to one year to complete. If there are tax issues, a will contest, sale of real property or other “extraordinary” matters a probate can easily take two years or more to complete.

Public Proceedings: Since probate is a court proceeding, all documents filed with the court become a matter of public record. This means that anyone can go down to court and obtain the names and addresses of your beneficiaries, a list of all of your assets and the value of your estate.

Thus, if saving money and time and maintaining privacy are important to you, you will probably want to avoid probate.

4. What is a living trust, a revocable trust, a family trust? and what is the difference between a trust and a will?

A living trust is a technique for avoiding probate. Often also referred to as a “family trust”, “revocable trust” or “inter-vivos trust”, a living trust is a way of holding title to assets so that they can pass to the named beneficiaries of the trust without a probate.

A will is an instruction for probate. A will is the instruction or “road map” that the court follows in supervising the transfer of assets from a decedent to living beneficiaries.

With or without a will there will be a probate unless the decedent’s assets have been transferred to a living trust or put in joint tenancy. If the total value of a decedent’s assets is $100,000.00 or more, there will be a probate of assets if there is a will or if there is no will. With a will, the court will follow the instructions for distribution contained in the will. Without a will, the court will follow the instructions for distribution contained in the probate code of the state of California (the laws of “intestate succession”).

Privacy: A trust, unlike a will, is a private instrument. Because a trust is private, it is more difficult to contest a living trust than a will.

Revocability: A trust, like a will, is revocable and amendable before death.

Transfer of Assets: The instructions in a will apply to any assets held in a decedent’s name at the date of death. A trust’s instructions apply only to those assets that have been transferred to the trust. Therefore, establishing an effective revocable trust will require transfer of assets to the trust. This requires execution of deeds, stock and bank account transfers as well as execution of the trust agreement itself. Consequently, trusts are more costly and time consuming to establish than a simple will.

Pour over Wills: Since a trust is only effective as to those assets that have been transferred to the trust, every revocable trust should be accompanied by a pour over will. The pour over will directs that any assets which have not been transferred to the trust as of the date of death be “poured over” into the trust and distributed in accordance with the instructions in the trust.

5. What about joint tenancy as a way of avoiding probate?

Joint tenancy is a common method of avoiding probate of assets. Joint tenancy gives each joint tenant the right to use and enjoyment of the entire property, and upon the death of one joint tenant, the property vests automatically in the surviving joint tenant, without necessity of probate.

However, joint tenancy is an incorrect, even dangerous way of holding title to assets if you do not want to give up control of the assets until your death.

The draw backs to joint tenancy are:

Loss of Control: Since each joint tenant can use or enjoy the joint tenancy property, you run the risk of your joint tenant using up or simply removing assets from joint tenancy accounts.

Unwanted Partners: You run the risk of becoming partners with your joint tenant’s Trustee in Bankruptcy, or your joint tenant’s ex-spouse in a divorce, or your joint tenant’s creditor.

Income Tax Disadvantages: If beneficiaries of your estate are your joint tenants, you are depriving them of a full step-up in basis by making them joint tenants. Married couples in community property states lose a full step-up in basis by holding title as joint tenants instead of as community property.

Property acquired from a decedent gets a basis equal to the fair market value as of the date of death. This means that the $500,000.00 home which you purchased fifty years ago for $20,000.00 will, when it is inherited by your beneficiaries, have a new basis of $500,000.00. Your beneficiaries can then sell the home for $500,000.00 and realize no taxable gain. Joint tenants get a basis equal to their percentage of the original $20,000.00 and your percentage of the $500,000.00 basis, resulting in taxable gain upon sale of the home for $500,000.00.

In short, do not hold title as joint tenants if your real intent is to give up control upon death. A revocable trust will avoid probate without the pitfalls of joint tenancy.

We don’t need to be reminded how disruptive the COVID-19 era has been. Schools, businesses, and public facilities are closed. Some are working from home, others are working in high-risk…

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